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To Build or Not to Build Self-Storage Is a Multi-Million-Dollar Question: Development Advice From a Veteran

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Self-storage development is a multi-million-dollar pursuit. To swing and miss on a project can leave you in a perilous financial position. Read a longtime advice for increasing your odds of success.

The self-storage industry is roaring back from the overbuilding that occurred in 2018, with many new facilities being planned or built nationwide. Of course, the rate of activity varies, depending on location. In my neck of the woods in Colorado, there were 50 new locations built between 2017 and 2018. The flurry was enough to anticipate a 10-year supply of space. Three years and a pandemic later, the market is strong, with occupancy and rental rates on the rise.

The question many would-be self-storage developers are asking is whether now is a good time to build a new facility. I can’t answer that for you; but if you are going to move forward, here’s my best advice.

Gain Perspective

In 2018, everyone wanted to be a self-storage developer, with newbie builders and investors scrambling to enter the market. Their plan was simple: Attend industry conventions, find a property, develop an excellent pro forma, ask investors for money, obtain bank financing, hire a local contractor, and presto! This approach may or may not have worked, depending on the answers to these important questions:

  • Did they buy the best possible site?
  • Did they thoroughly evaluate the competition?
  • Did their construction budget have a minimum 5% contingency?
  • If their project needed more capital, did they have the resources to obtain it?
  • Was their pro forma accurate, with margin for error?
  • Was their lease-up timeline realistic?
  • Did the planned property tax show the actual appraised valuation?

These questions hit on many of the critical areas that determine project success and help you avoid expensive pitfalls. The last thing you want is for your development to become a financial disaster, meaning neither you nor your investors reap rewards. I don’t want to frighten you from entering the market, but you should remember that you’re risking the money of banks, friends, family or whoever is backing you, along with your good credit. It isn’t the project itself that can create ruin for you and your investors, it’s the debt.

I remember vividly the day my first self-storage facility opened in 1995. It was late July, and we’d received a temporary Certificate of Occupancy the day before. There wasn’t any landscaping yet, but we needed to generate income. Well, we didn’t receive any rentals on the first day, and I had no idea how I was going pay back the $1.3 million loan my partner and our wives had personally signed at the bank. Fortunately, we got five rentals the next day and more than 100 by the end of August. All these years later, I still make mistakes, but I’ve learned how to minimize them.

To avoid costly errors, it’s helpful to look at recent self-storage facilities that should never have been built. If you’re interested in a market, ask brokers and developers about these sites, including what they believe went wrong. Realistically, you probably aren’t going to get straight, insightful answers from the teams that built these “problem” projects, but other developers may have insight.

Whether you’re new to self-storage development or experienced, strive to limit your blunders. Ask advice from seasoned industry veterans.

Critical Considerations

As a potential self-storage developer, look seriously at all the variables that’ll factor into the success (or failure) of your project. Be willing to invest money in determining whether a site is viable. Are you willing to walk away from $25,000 or $100,000? The initial upfront cost may be far less than the millions of dollars lost if you build an unsuccessful business. Here are some key areas on which to focus:

Location. Don’t ignore the importance of this. When I first started as a commercial real estate broker in the early 1980s, I was fortunate to handle approximately 20 land deals for Public Storage Inc. The company always wanted the best site, with high traffic counts and great visibility. It fully evaluated the market and really did its homework, turning down many opportunities before accepting a site. This operational giant knows that not every parcel will be viable for self-storage. You must scrutinize the variables, examine the feasibility closely, and have the fortitude to walk away when prudent.

Competition. Every self-storage project warrants proper evaluation of the competition. If you’re ready to make a multi-million-dollar investment, it’s worthwhile to investigate local rates, occupancy, units auctions, etc. With a first-month-free special, you can visit a competing facility and maybe even rent a unit. Visit a couple times with partners, investors and bankers to determine if you’re targeting the correct market.

I remember a situation in 2017 in which two developers decided to build just three blocks from each other. They knew of each other, and I presume the banks were aware of the new competition coming online. There was large institutional investment and other people’s money involved, and unfortunately, I don’t believe the properties were successful during lease-up. One changed management companies, which in a new project is usually an indication that ownership changed. If you find yourself in a similar scenario, you have to decide if you have the financial stability to build near a new competitor.

Zoning. Another important consideration is whether your target site is zoned for self-storage. If it isn’t, what are you willing to risk to properly zone it? Back in the ‘90s, I never really considered the cost of rezoning. Things were much easier to navigate in those days. I had the good fortune of collaborating with a planner who had expertise in rezoning sites for self-storage. Back then, my costs were about $5,500. Today, you have to budget $100,000 to $200,000 for rezoning, planning, engineering and design before you can obtain approval. This is critical, though, because zoning sets the footprint of your final design.

Site Design

Speaking of self-storage design, let’s look at a few project elements that are critical in this area. A proper market evaluation will help you determine the following:

Facility type. Your pro forma may look better with a multi-story configuration, but are you kidding yourself? I’ve always used a mix of multi-story and drive-up, except for at one facility in a central business district. Using a combination doesn’t limit customer choices, it creates more. Just remember that with multi-story there are added factors including land and building costs, elevators, and sprinkler systems.

Unit mix. Consider this carefully. You need a mix of unit sizes and types that’ll best serve customers in the area and facilitate lease-up, not the ratio for the best pro forma.

Site layout. Here, you need to think through everything. Consider foot and vehicle traffic flow from the perspective of new and existing customers as well as staff. How will people enter the office? A good office design often incorporates two doors—one to the parking lot and another to the secure portion of the facility. Here are some other things to consider:

  • Where will the golf cart be parked?
  • Where will you put handicapped parking?
  • Where will the hand carts go?
  • Is there ample room in the hallways for customers to access their units and the elevators?
  • Do you have room for a maintenance area?

Also, where will you put the trash enclosure? Try to provide separate access for garbage trucks to avoid them driving through your site. Trust me, you don’t want to risk damage to your buildings or have the excessive weight of these trucks on your property any more than necessary.

Aesthetics. It’s important how your self-storage facility will be perceived by the community. Will the design be cookie-cutter or customized to complement the neighborhood? Visibility is always a concern. My preference is to use natural colors and a look that fits the local aesthetics. If you can, enhance your property with grass, trees and flowers. Your goal is a well-designed site neighbors and customers will appreciate. It’ll also help your case with the local municipality.

Dig In

Other self-storage developers want you to be successful. When you fail, we all lose. Similarly, a high tide raises all ships.

Building a storage facility is difficult and risky, but it can also be extremely rewarding. There are many steps you must take before seeking investment partners, bankers and contractors, and long before putting a shovel in the ground. Look at many sites before you choose and analyze them carefully before you start construction. Seriously consider the impact of the risk you’re taking, and work with others with a proven history to give you guidance. Good Luck!

Hank Saipe is the owner of Mile High Self Storage LLC. He began his first self-storage development in 1992 and now has five facilities comprising 4,000 units in the Denver metropolitan area. He started his career as a commercial real estate broker. To reach him, call 303.888.1260; email [email protected].

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